The African Continental Free Trade Area III – Is Africa ready?

Speaking with one voice as a continent will emerge as perhaps the most important provision of all for the success of the African Continental Free Trade Agreement

- Paul Kagame[1]

No one is under any illusion that achieving AfCFTA is going to be easy. Issues will emerge around harmonising Regional Economic Communities’ (REC) tariff schedules and rules, creating a framework suited to a set of 54 vastly different economies, assuring buy-in from the private sector and some of Africa’s more dictatorial leaders and securing sufficient funding for operative Trade Facilitation (TF).

This brief deals with each of these challenges, beginning with perhaps the most current and pressing issue of Nigeria’s hesitation to join AfCFTA.

1. Nigerian membership

Six countries are yet to sign AfCFTA – Benin, Botswana, Eritrea, Guinea Bissau, Nigeria and Zambia. The AU’s Commissioner for Trade and Industry, Albert Muchanga, announced that ‘We are in constant touch with the six countries that haven’t signed. Most of them have indicated that they should be able to sign before the end of the year’.[2]

Whereas for Botswana and Zambia it is merely a case of getting the agreement through the relevant legal processes, small economies like Benin, Guinea and Eritrea, have reason to perceive the agreement as risky. It is feared that traditional and small-scale farms will not be able to compete with large agri-businesses in high-income countries.

AfCFTA can certainly go on without these smaller players, but AU states recognise that Nigeria’s membership is necessary for the agreement to achieve its potential.

Nigeria’s president Muhammadu Buhari tweeted in March: ‘We are widening and deepening domestic consultations on the CFTA, to ensure that all concerns are respectfully addressed. Any African free trade agreement must fairly and equitably represent the interest of Nigeria, and indeed, her African brothers and sisters’.

This was in response to a trade union and private sector outcry after Buhari committed to signing AfCFTA in Kigali in March 2018. At a roundtable that month, stakeholders raised some important issues: ‘What coherent domestic trade policy is the Nigerian government using to negotiate the CFTA?’, ‘97% of Nigeria’s exports comprise of crude-oil. Low tariffs in other goods would unduly expose the country’s manufacturing companies to threats from more competitive products’.[3]

While Nigeria’s private sector fears that the agreement will destroy business, trade unions are concerned about unemployment and are disaffected by Buhari’s failure to consult them. The Nigerian Labour Congress has introduced strong political dimensions to the debate, describing AfCFTA as an ‘extremely dangerous and radioactive neoliberal policy initiative’ ‘that seeks to open our seaports, airports and other businesses to unbridled foreign interference’.[4]

The Nigerian Ministry of Trade’s dealings with stakeholders is now at a critical point. With strong pressure from Ghana’s Akufo Addo, Niger’s Issoufou and Cyril Ramaphosa, it is hoped that Buhari will step up to the plate.

2. Different economies, diverging interests

AfCFTA is host to the greatest level of income disparity of any continental trade agreement – more than double the levels witnessed in blocs such as the ASEAN and CARICOM.[5] Agreeing on tariff liberalization schedules for such disparate economies is going to rely on a steadfast respect for Special and Differential Treatment (SDT) by some of the bigger players.

But South Africa’s past experience with RECs paints a bleak picture. The Southern African Development Community (SADC) was founded in 1992. By 2012, despite a well-defined socio-economic roadmap with a harmonised and legally binding Protocol on trade liberalisation, intra-regional trade remained low and progress towards economic integration has all but stalled. Although publicly committed to the agreement, many members reneged on implementation.[6]

Malawi, Mozambique and Zimbabwe failed to reduce tariffs on South African goods, arguing that the loss of potential tariff revenue was too great. Unlike AfCFTA, the SADC excluded a number of important products like vehicles, base metals, minerals and textiles. Trade in sugar – viewed as a ‘political good’ – was a source of major dispute and eventual impasse.

The Tripartite Free Trade Agreement (TFTA), which includes COMESA, EAC and SADC states, has risen to replace the failed trade dimension of SADC. However, the agreement is yet to be implemented. South Africa is one of 20 out of 22 members which have not ratified the TFTA. Domestic concern has centred on dumping, sub-grade products and the preparation of national adaption measures to curb job loss. But Department of Trade and Industry (DTI) members are unanimous in their support for ratification.[7]

Of course, AfCFTA would subsume all of South Africa’s other memberships, but its fate is still tied to states’ commitment to the long-run. While industrialised countries are well-placed to take advantage of opportunities in manufactured goods, less-industrialised ones can benefit from trade facilitation and linking to continental value chains. Meanwhile, agricultural economies can respond to the demand for Africa’s growing food security requirements.

Although Africa’s history with FTAs speaks for itself, there is hope that continent-wide hype, enthusiasm for change and positive projections for AfCFTA will carry it through to completion. Visionary leaders must continue to emphasise its inevitable and widespread benefits and construct and implement measures designed to harness opportunities and mitigate against losses.

3. Regional Economic Communities

The African Union is host to eight recognised RECs, some with overlapping memberships:

1. Arab Maghreb Union (UMA)
2. Common Market for Eastern and Southern Africa (COMESA)
3. Community of Sahel–Saharan States (CEN–SAD)
4. East African Community (EAC)
5. Economic Community of Central African States (ECCAS)
6. Economic Community of West African States (ECOWAS)
7. Intergovernmental Authority on Development (IGAD)
8. Southern African Development Community (SADC)

These were formed out of the AU’s 1991 Abuja Treaty as building blocks for continental economic integration. More recently however, as a result of their various inefficacies and disparities, RECs are often viewed as hindrances to the integration process. One of the AU’s central objectives for AfCFTA is to ‘resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration process’.[8]

AfCFTA manages the issue of multiple memberships by Article 19, which states that ‘in the event of any conflict and inconsistency between this Agreement and any regional agreement, this Agreement shall prevail’ but that ‘State Parties that are members of other regional economic communities, regional trading arrangements and custom unions, which have attained among themselves higher levels of regional integration than under this Agreement, shall maintain such higher levels among themselves’.[9] In other words and characteristic of FTAs, AfCFTA serves as the baseline for existing REC liberalisation.

UNCTAD recommends a clean slate approach when dealing with RECs, pointing to the difficulty of harmonising so many tariff schedules and policies.[10]AfCFTA has adopted this approach, but continues to identify RECs as important implementing partners to be represented in an AfCFTA Committee of Senior Trade Officials. Their role includes resolving non-tariff barriers and coordinating and monitoring implementation.[11]

AfCFTA undertakes to learn from existing REC frameworks and harness their institutional capacity, but to start from the ground up as far as tariff schedules and non-tariff barriers are concerned. This process will be guided by the unifying objective of truly free trade.

4. Negotiation and implementation

Some areas of negotiation and implementation are going to require prolonged focus and extensive research, resources and compromise.

Non-tariff barriers

NTBs include import prohibitions, quotas, export subsidies, export restrictions as well as Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary measures. These are difficult to identify, but they seriously hinder trade. In accordance with AfCFTA’s plan to eliminate NTBs, a database should be implemented which identifies and seeks remedial action for NTBs. Such a mechanism is in place for TFTA countries. As of November 2016, 490 out of the 543 complaints filed through the database were resolved.[12]AfCFTA’s success depends on the careful design of such a mechanism and on it being given sufficient support and enforcement potential through the Dispute Settlement Body (DSB).

Rules of Origin (ROOs)

ROOs are an important aspect of FTAs, dictating the elimination of tariffs in respect only to goods originating in the customs territories making up the FTA. ROOs require a resolution on how to tariff goods that have undergone transformation in a member state. Article 13 of AfCFTA says that goods are eligible if they originate from a member state ‘in accordance with the Appendix to be developed on General and Product Specific Rules’.[13]

The UN’s Economic Commission for Africa asserts that ‘it is critical to find a balance between a simple ROO system that encourages trade and diminishes disputes and a complex and fair one that benefits member countries’.[14] The SADC is an example of an FTA that prescribed over-complicated ROOs which contributed to the erosion of the agreement.[15]AfCFTA will have to create coherence across the RECs’ various systems and ensure institutional capacity for implementation and monitoring.

The Private Sector

Buy in from the private sector is critical to the success of AfCFTA. Governments must communicate that long-run benefits will outweigh the initial transaction costs of forming new relationships with other businesses inside the FTA. Lack of local participation is behind Nigeria’s reluctance to sign onto AfCFTA, illustrating the need for a consultative and coordinating mechanism that allows stakeholders to participate.

This was agreed to by the AU Assembly at the 2018 summit, where it was also decided that the AU would undertake campaigns to encourage all Africans, including ordinary citizens and business people, to embrace AfCFTA. Civil society and private sector forums have been organised for next year’s AU gathering in Niger.[16] In South Africa, Cyril Ramaphosa has been on ‘a charm offensive’, emphasising the role of the private sector supported by the lending capacity of financial institutions.[17]

Trade Facilitation

TF is the sine qua non of AfCFTA and includes infrastructure, transportation, security and customs clearance. Currently, the cost of moving goods in Africa is five times higher than in the US. In some areas of Africa, transport costs alone constitute higher barriers to trade than any other trade restrictions.[18] However, TF must go beyond the traditional preoccupation with transport and roads, targeting logistics companies, delays at border controls, corruption and customs regulations.

The need for TF was exemplified in Rwanda when the introduction of an electronic single-window customs clearance system took the country from 131^st to 87^th in the World Bank’s ease of trade ranking. UNCTAD’s automated customs data system would be useful to this end and has already been adopted by 44 AU states.

According to UNCTAD, if improvement in TF is realised through AfCFTA, a further $ 85 billion would be added to intra-African trade.[19] A renewed vigour is required in the continental efforts already underway to improve TF.

5. The essential role of the state

Each of the aforementioned challenges point to the need for a dedicated strategy and institutional arrangements at the national level.

Governments must create enabling conditions for citizens to leverage the opportunities of AfCFTA and mitigate against losses. Given imminent economic transformation, policies should focus on social safety nets and skills, the private sector and international investment, decreasing red tape for SMEs and business costs in identified sectors and tax incentives to stimulate demand. To this end, a strong communications strategy must be adopted by member state governments, that reaches the majority of stakeholders and citizens.

Substantial new resources will need to be furnished by member states and development partners. UNCTAD has advised that funds be made available as soon as possible to secure commitment and progress.[20] This will rely on the will of major players like South Africa which, to prevent stagnation of the negotiations, must demonstrate commitment to AfCFTA and ratify the agreement.

In the end, much will depend on communication, diplomacy and a favourable political climate to avoid the political traps that have often inhibited FTAs in the past.

Africa: Outwards and upwards

IqbalSurvé, the former Chairman of the BRICS business council, said in 2018 that ‘[i]t will take many years to translate this new policy into effective continental trade. The most important thing now is that we have reached an agreement between the majority of African countries to achieve this’.[21]

There is no denying that the path to free trade in Africa is going to be challenging, lengthily and onerous. Short-run losses are inevitable in some sectors and the distribution of benefits will not be uniform across the African continent. For AfCFTA to be successful, it is essential that African leaders play their part, keep the bigger picture in mind, and put long-run economic growth and upliftment before their short-run political agendas.

To garner the support it deserves, AfCFTA must be presented to Africa as the big deal that it is: It has the potential to trigger a virtuous cycle of intra African trade, which will drive the structural transformation of economies with a positive impact on employment and poverty. It has the potential to challenge the age-old dynamic of dependency, and give Africa command over its future.

As countries across the globe begin to retreat inwards, will Africa muster the courage to look outwards and upwards? Is Africa ready for AfCFTA?

Tove van Lennep
Researcher
tove@hsf.org.za

[1] IOL, 3 July 2018. Continent's free trade deal a game-changer for Africa